In a far-reaching decision that could force corporations to stay out of public-policy debates related to their own products or services, the California Supreme Court held in Kasky v. Nike, Inc.1 that a business could be liable to consumers for commercial deception based on "issue advertising" long thought to be fully protected by the First Amendment. The court held that Nike advertisements responding to allegations about the company's labor practices amounted to merely "commercial speech," notwithstanding that they addressed a simmering public controversy, because one purpose of the ads may have been to further sales of Nike's products.

The decision represents a radical departure from First Amendment principles, and a threat to corporate speech generally. First, some background: In 1986, the California Supreme Court reviewed United States Supreme Court precedents and held that "commercial speech" was defined "as speech that does 'no more than propose a commercial transaction . . . .'"2 The court stressed that "commercial motivation does not transform noncommercial speech into commercial speech."

The "no more than" definition was a sensible one, embraced in many United States Supreme Court cases, from Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc. ,3 to City of Cincinnati v. Discovery Network, Inc.4 As a matter of public policy, governmental regulation of "commercial speech" was justified because such speech is not expression if it does "no more than" propose a commercial transaction. Justice Stevens summarized the reasons for this narrow First Amendment exception in 44 Liquormart, Inc. v. Rhode Island,5 as follows:

[T]he State's power to regulate commercial transactions justifies its concomitant power to regulate commercial speech that is "linked inextricably" to those transactions. [Friedman v. Rogers, 440 U.S. 1, 10 n.9 (1979); Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456 (1978)] (commercial speech "occurs in an area traditionally subject to government regulation"). As one commentator has explained: "The entire commercial speech doctrine, after all, represents an accommodation between the right to speak and hear expression about goods and services and the right of government to regulate the sales of such goods and services." [Laurence H. Tribe, American Constitutional Law § 12-15 at 903 (2d Ed. 1988)].

Thus, the sole justification for government's extraordinary power to regulate commercial speech is the relation of that speech to commercial transactions, as the California Supreme Court recognized in 1986.

That was then; this is now. On May 2, 2002, in Kasky, the same court by a one-vote margin rejected this long-established authority, holding that Nike's defense of overseas labor practices, responding to a major public controversy,was nothing more than "commercial speech" and could be suppressed by a plaintiff who suffers no damages but files suit claiming misrepresentations under California's Unfair Competition Law ("UCL") (Bus.& Prof Code § 17200 et seq.) and false advertising law (Bus.& Prof Code § 17500 et seq.).

The Kasky case grew out of a major public debate about labor conditions in Asian countries with lower labor costs than in the United States. Because its shoes were manufactured overseas, where costs were cheaper, Nike had been the target of anti-globalization activists and was the subject of major media coverage of their allegations. Beginning in 1996, in a major public relations campaign waged in the news media, Nike's critics alleged that workers in factories that manufactured Nike's products were paid less than the applicable local minimum wage and were subjected to abuse and unhealthy working conditions. Those reports received wide coverage and transformed Nike's labor practices into matters of significant public interest and concern, making Nike (in the words of a noted First Amendment commentator) "the poster child for the perceived social evils of economic globalization."

In response, Nike vigorously defended its manufacturers' practices and actively participated in the public debate on globalization. As the court noted, "Nike and the individual defendants made these statements in press releases, in letters to newspapers, in a letter to university presidents and athletic directors, and in other documents distributed for public relations purposes. Nike also bought full-page advertisements in leading newspapers to publicize a report that GoodWorks International, LLC., had prepared under a contract with Nike. The report was based on an investigation by former United States Ambassador Andrew Young, and it found no evidence of illegal or unsafe working conditions at Nike factories in China,Vietnam, and Indonesia." The company's responses to its critics - including a letter to the editor written in response to a New York Times columnist who had criticized Nike's operations in Asia - became the focus of the Kasky complaint filed by several plaintiffs' class-action lawyers.

The lawsuit was dismissed by the trial court, because only commercial speech could give rise to claims under the UCL and false advertising laws and the Nike campaign was not commercial speech. The intermediate appellate court affirmed the dismissal, concluding that Nike's statements were noncommercial speech and, consequently, fully protected by the state and federal constitutions.

In its Kasky decision, the California Supreme Court reversed this ruling, introducing a new and extraordinarily broad definition of commercial speech. The court majority rejected the United States Supreme Court's "no more than" formula and instead devised a three-part test for determining whether particular statements constitute commercial speech. The test, it said, applies "when a court must decide whether particular speech may be subjected to laws aimed at preventing false advertising or other forms of commercial deception. . . ."

Under the test invented by the Kasky court, three elements must be considered: the speaker, the intended audience, and the content of the message. The three-part commercial speech test devised by the Kasky majority sweeps within its ambit almost any statements by any corporate or commercial speaker, or entity, involving any public controversy that touches upon the defendant's practices and policies.

First, according to the Kasky majority, the "speaker" element of the test will be met whenever the speaker is "someone engaged in commerce" - that is, generally, the production, distribution or sale of goods or services - or "someone acting on behalf of a person so engaged." Obviously, statements by any commercial enterprise will satisfy the "speaker" element of the test. Even statements made by nonprofit organizations could be included. Media entities that discuss media news would potentially be subject to the new Kasky rule.

The second element - the "intended audience" for the speech - is similarly broad and explicitly focuses on statements made to members of the press. This element is satisfied if the intended audience is "likely to be actual or potential buyers or customers of the speaker's goods or services, or persons acting for actual or potential buyers or customers, or persons (such as reporters or reviewers) likely to repeat the message to or otherwise influence actual or potential buyers or customers." A broader and more public and newsworthy controversy, according to Kasky, increases the likelihood that statements will be deemed commercial speech.

The third Kasky element - the "content" of the speech - is satisfied if the "speech consists of representations of fact about the business operations, products, or services of the speaker (or the individual or company that the speaker represents), made for the purpose of promoting sales of, or other commercial transactions in, the speaker's products or services." From the standpoint of the Kasky case, this requirement is merely a matter of pleading - and is satisfied if a lawyer can allege that a corporation's ultimate purpose is promoting sales. Kasky's counsel simply alleged the obvious, that Nike's letters to the editor and press releases concerning its labor practices, "although addressed to the public generally,were also intended to reach and influence actual and potential purchasers of Nike's products."

Every public relations effort, of course, is designed to "reach" and "influence" consumers. Indeed, the court majority swept broadly to encompass any statement that may affect a company's image, stating "it is necessary,we think, to adequately categorize statements made in the context of a modern, sophisticated public relations campaign intended to increase sales and profits by enhancing the image of a product or of its manufacturer or seller." The court also suggested (contrary to substantial judicial precedents) that "Nike's speech is not removed from the category of commercial speech because it is intermingled with noncommercial speech." The "policy questions" discussed by Nike, it said,were protected speech; the factual information that explained and substantiated Nike's policy arguments was not. In effect, by defending its views on these important policy questions and challenging the public relations efforts of anti-globalization activists, Nike was doing nothing more than peddling shoes.

Justice Brown wrote a compelling dissent, as did Justice Chin, with Justice Baxter concurring. In his dissenting opinion, Justice Brown noted that the majority's commercial speech test, "taken to its logical conclusion, renders all corporate speech commercial speech." Indeed, the majority's test "contravenes longstanding principles of First Amendment law" and "stifles the ability of speakers engaged in commerce, such as corporations, to participate in public debates over public issues."

Both dissenting opinions also noted how the majority's test unfairly, and unconstitutionally, handicaps one side of the public debate. Justice Brown stated that "[u]nder the majority's test, only speakers engaged in commerce are strictly liable for their false or misleading representations . . . . Meanwhile, other speakers who make the same representations may face no such liability, regardless of the context of their statements." Justice Chin added:

[w]hile Nike's critics have taken full advantage of their right to "uninhibited, robust, and wideopen" debate, the same cannot be said of Nike, the object of their ire. When Nike tries to defend itself from these attacks, the majority denies it the same First Amendment protection Nike's critics enjoy. . . .

Finally, the dissenters pointed out how the Kasky majority also violated existing First Amendment precedents that grant full constitutional protection to "mixed" commercial and non-commercial speech. For example, Justice Brown noted that, under the usual commercial speech test, where commercial speech and noncommercial speech are "inextricably intertwined," the courts "must apply the 'test for fully protected expression' rather than the test for commercial speech." Justice Chin agreed, noting that "Nike realistically could not discuss its general policy on employee rights and working conditions and its views on economic globalization without reference to the labor practices of its overseas manufacturers, Nike products, and how they are made. . . . Attempting to parse out the commercial speech from the noncommercial speech in this context `would be both artificial and impractical.'"

Kasky's new test for distinguishing commercial speech from other expression, to the extent that it is directly contrary to existing United States Supreme Court precedent, seems designed to demand review by the Court on a petition for certiorari. In fact, even as it rejected the Court's commercial speech definition, the Kasky majority went out of its way to suggest its holding was "based on decisions of the United States Supreme Court." While seemingly aberrant, the case joins several other recent trial and appellate rulings that have attempted to expand the category of "commercial speech" - and have also rejected the traditional Supreme Court test.6Kasky may force the Court once again to clarify that protected speech remains protected speech, regardless of the economic motivations of the speaker.

By hamstringing one side of a major public debate but not the other, however, Kasky's attempted creation of a new category of "creeping commercial speech" presents special risks to fundamental First Amendment values. Kasky is a dangerous precedent, which could punish corporations and employees who attempt to discuss public issues of concern only to become targets of California plaintiffs who disagree with their views. At the end of July, the California Supreme Court refused to reconsider its decision. Nike is expected to seek certiorari this fall, requesting a ruling that rejects the novel concept of "creeping commercial speech" and reminds the lower courts of the proper constitutional definition: "speech that does no more than propose a commercial transaction."